USDJPY: Rate differential suggests 120 should be justified by end-2017 - Nomura

Yunosuke Ikeda, Research Analyst at Nomura, notes that the USD strength has accelerated since US election and rate differential and position unwinding have made JPY the weakest currency.

Key Quotes

“JPY appreciation in 1H 2016 mostly reflected USD weakness. Life insurers hedge activity also had some impact. Higher hedging costs mean potential investment in foreign bonds without FX hedges.”

“JPY flow dynamics is no longer a primary source for JPY depreciation. Still, rate differential suggests 120yen/dollar should be justified by end-2017.”

“Sustainability of USD strength should be depending on Chinese economic situation. Solid Chinese macro might have explained the sharp rise in global interest rates we’re seeing.”